The Price of Boredom

The valuations of the largest companies illustrate the point. Waste Management trades at approximately 31 times its latest annual earnings, Republic Services at around 32 times and Waste Connections at nearly 39 times. Clean Harbors is also trading at around 39 times earnings. These are multiples that, just a few years ago, would have been more commonly associated with high-growth tech companies than firms whose core business is hauling away trash.

By comparison, Nvidia is trading at approximately 27 times its latest annual earnings on the same basis. In other words, investors are now paying a higher earnings multiple for some companies whose main business is waste collection and processing than for the biggest winner of the artificial intelligence boom. That says something about the price of stability.

Not All Waste Is the Same

But this apparent simplicity is somewhat deceptive. A closer look at the sector quickly reveals that waste management is not a single business. Collecting municipal waste is one thing; operating a landfill, an incinerator or a recycling plant is another. The disposal of hazardous waste is an entirely different discipline.

This difference is clearly evident in the five-year performance of individual stocks. Five years is a long enough period to ensure that the results are not merely the product of a single successful year or a short-term stock market trend. The S&P 500 index, which gained approximately 80% over the same period, provides a useful benchmark.

The biggest winner in this comparison is Clean Harbors. Its stock has returned more than 220% to investors over the past five years. The company does not focus on ordinary municipal waste collection, but primarily on hazardous and industrial waste, its incineration and the disposal of materials that a typical waste management company cannot handle.

Second is Republic Services, with a return of around 90%. The company represents a much more traditional waste management business: municipal waste collection, landfills and recycling. The sector’s biggest name, Waste Management, operates a similar model. However, its five-year return is “only” around 50%. In addition to collection and landfills, the company continues to invest in recycling, medical waste and energy production from landfill gas.

Waste Connections has performed even more weakly. Operating primarily in the US and Canada, the company provides waste collection and landfill services. Its stock has gained just under 30% over five years.

Bringing up the rear in this comparison is GFL Environmental, with growth of around 20%. GFL has expanded rapidly in recent years through acquisitions, but this model has also led to higher debt. That becomes problematic when interest rates rise, making debt more expensive.

The stock performance reveals an interesting pattern. Even though stocks in this sector are very expensive, only Clean Harbors significantly outperformed the S&P 500 index. Republic Services managed to do so only narrowly. The best-known company with the largest market capitalization in the sector – Waste Management, with a market cap of $85bn – lagged behind the index as a whole.

Buying an expensive stock is therefore not a universal recipe for beating the market. Successful investing still requires careful stock picking within a given sector – selecting individual stocks for an investment portfolio based on an analysis of technical and fundamental factors. What, then, explains Clean Harbors’ success compared with other publicly traded companies in the sector?

Dirt That Pays Off

The answer lies primarily in what Clean Harbors does. The company specializes in hazardous and industrial waste, where the barriers to entry are much higher than in traditional municipal waste collection. Buying garbage trucks and securing a contract with a city are not enough. Specialized equipment, permits and, above all, the know-how to handle hazardous materials are also required.

Another advantage is that this part of the sector is even more heavily regulated than traditional landfills. There is no indication that regulatory requirements will ease in the future. Clean Harbors charges a premium for meeting these requirements, and this is already reflected in the company’s financial statements.

In the second quarter, Clean Harbors’ revenue rose 11.9% year over year to a record $1.74bn. Profitability grew even faster, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rising 22% to $409m. The key to margin growth is incinerator utilization, which increased from 86% to 91%.

The company’s growth was driven primarily by the PFAS segment – so-called forever chemicals – which includes substances used in Teflon and fire extinguisher charges. Regulations are tightening year after year, while lists of hazardous substances continue to expand. For most companies, these new measures represent an additional cost, but for Clean Harbors, they translate into higher revenue as well as significant protection from competition.

Clean Harbors demonstrates that even in a sector as seemingly straightforward as waste management, simply acquiring the largest or best-known company is not enough. What matters most is the type of waste a company processes and how difficult its services are to replace.

Waste management may be a boring business. Yet the paradox of environmental policy is that, so far, the highest returns for investors have come not from recycling or clean technologies, but from the dirtiest and most problematic part of the waste management business.